Basic Guidelines for Selection of
ORP vs. TRS
Elena Gaidouk
Michael Sergi
Clint T. Skipper
Why Our Problem Is Important?
• UH faculty have to choose between TRS
and ORP.
• Enrollment in ORP in lieu of TRS is
a one-time, irrevocable decision.
• Therefore some ORP-eligible employees
may have difficulties in making this
choice, which would ultimately affect their
past-retirement income.
Procedures Used
• In this project we outlined major points
that should be considered while
making this decision and provided
basic guidelines for the selection.
• We also developed linear
compensatory model using three major
cues: age of the employee, attitude
towards risk, and job security (such as
tenure).
Findings
TRS
• Provides benefits for service
retirement, disability retirement, and
death of a member or retiree
• Statutory retirement formula:
years of service x
average of highest five annual salaries x
2.3%
Findings (cont.)
ORP
• An individualized retirement plan in
which each participant selects from a
variety of investment products
provided by several companies that are
authorized by the employing
institution.
Major Difference
• The essential
difference is that
TRS is a defined
benefit program,
while ORP is a
defined
contribution
program.
What Does It Mean?
Optional Retirement Program
Teacher Retirement System
•
Benefits are determined by the
contributions and investment
earnings in a person's account.
•
Benefits are determined by a
formula, and benefit levels are
guaranteed.
•
The employee bears the
investment risk.
•
The employer bears the risk.
•
The employer's responsibility is to
make the scheduled
contributions.
•
Investment performance affects
funding, and does not directly
affect benefits.
•
Members have individual choices
among investments.
•
Members have no individual
control of benefit levels.
•
Benefits consist of the account
balance, which can be annuitized
for lifetime income.
•
Benefit levels are guaranteed for
a retiree's lifetime.
Other Differences
ORP
TRS
Vesting
One year plus one day
Five years
Portability
Full
None
Disability
Does not provide benefits
Provides benefits
Survivor
Does not provide benefits
Provides benefits
Other Differences (cont.)
Risk of Insolvency
• Currently, the TRS has an actuarial
valuation of assets at $89,299 M with
an accrued actuarial liability of
$102,495 M. This is a $13,196 M
deficit or assets equal to 87.1% of
liabilities
• The percentage of assets to liabilities
has been eroding since 2000
TRS Financial Condition
(1)
Valuation
as
August 31
2000
2001
2002
2003
2004
2005
Funding Ratio
Assets as a
% of AAL
(2)/(3)
107.40%
102.5
96.3
94.5
91.8
87.1
Year
2000
2001
2002
2003
2004
2005
Annual Required
Contributions
Percentage
Rate
Contributed
4.92
122
4.12
146
5.7
105
7.15
84
7.39
81
7.31
82
The state may need to increase its
contribution to the program to meet
the shortfall.
ORP and Market Risk
• Enrollees in the ORP plan are exposed
to market risk.
• Enrollees can be over exposed to risk
at different stages of their career.
• Returns from proper investment mix
can increase retirement benefit.
• How much risk must be taken to
achieve the 8% TRS return?
Other Differences (cont.)
Cost of Living Adjustment
• Currently no recurring inflation adjustment to pension plan
 “Ad-hoc” adjustments to “catch-up” with inflation
 Legislation can pass benefit increase when fund is “sufficiently sound” for
31 years
 In other words, cannot when unfunded liabilities of plan exceed 31 years
 Every legislation since 1975 has made “COLA” adjustments
• 1993 Four installment plan to replenish fund purchasing power




Round
Round
Round
Round
1
2
3
4
in 1993- 5-15% increase, with older retirees getting high end
in 1995- 14% increase
in 1997- 7.5% increase
was supposed to occur in 2001, but instead changed multiplier
• Currently active pursuit to urge Texas Legislature to annualize
a minimum pension “COLA”
Other Differences (cont.)
Cost of Living Adjustment cont’d
• To put into perspective- imagine employee who entered the
TRS plan in 1992
• 1993- 5% increase (assuming minimum adjustment)
• 1995- 14% increase
• 1997- 7.5% increase
• Total of 26.5% increase, or roughly 2% per year
• 26.5% increase/14 years= 1.90% per year
• Assuming TRS auditor’s 3% inflation estimate, this individual’s
pension should have been adjusted by 42%
• 14 years times 3%= 42%
• Proposal for 80th Legislation session to waive “31 year” rule
and grant annualized pension cost-of-living adjustments
• Bottom line: The “Rule of 31” Law is eroding the purchasing
power of TRS retirement benefits
Who Should Choose ORP?
• Employees who terminate employment at a
young/middle age
• Employees hired at young ages
• Employees with modest pay increases over a
career
• Employees who achieve a higher rate of
investment return, through personal investment
selection
• Employees with short life expectancy
Who Should Choose TRS?
• Employees who retire early
• Employees hired in mid-career
• Employees with substantial pay increases at the end
of career
• Employees who try to avoid any risk associated with
the investment decisions
• Married employees, because of survivor benefits
• Employees with long life expectancy
More Complicated Cases
Use Linear Compensatory Model
O=A+R+S
Limitations
• We are not experts
• In our linear compensatory model we use
only three cues, while there are other ones
• The weights assigned to cues in the model
may be wrong
• Our model mostly addresses strong
preferences cases
• Our model has not been tested
Thank you!
We wish you all